Oil prices plummet amid continued oversupply, with no end in sight

Oil may be a precious and dwindling resource but at the moment, at least, it looks like we just have too much of it.

Crude-oil prices are now at their lowest since early April, hit by continued oversupply, concerns about global demand and negative price sentiment by oil-market participants. And that situation looks likely to continue in the near future.

The US crude oil benchmark price, West Texas Intermediate traded at the New York Mercantile Exchange, closed at $39.51 a barrel on Tuesday, the first time since 6 April. The global Brent crude oil benchmark closed at $41.50 on Tuesday, a three-and-a-half month low. As of midday Wednesday, prices were just above those levels.

Prices rebounded by the end the week following a better-than-expected July US jobs report. September WTI crude oil settled at $41.83 a barrel and October Brent closed at $44.28. But US petroleum prices are down about 25% from the June highs of around $52, putting them in bear-market territory. However, they remain above the depths of the decade-plus price lows established in February, when US prices fell under $30 a barrel.

Some of the reasons for crude oil’s June rise are also responsible for its current retreat, market watchers said. There were a series of supply outages earlier this year, said Bill O’Neill, a principal at commodities consulting group LOGIC Advisors, such as Canadian wildfires in the oil-sands region, sharp production decreases in Nigeria and Libya and an oil workers’ strike in Kuwait.

“Those have been more or less solved, or been alleviated. So we’re seeing a glut of supply as production in most of those areas is returning,” O’Neill said.

At the time there were hopes the production outages and relatively lower prices would mean higher demand would drain the bloated inventories to finally bring the crude oil market back into balance between supply and demand, said Rob Haworth, senior investment strategist at US Bank Wealth Management.

However, when US crude-oil prices hit $50, it encouraged some US shale-oil producers to open the spigots again, as evidenced by a few weeks of rising oil-rig counts, said Stewart Glickman, head of energy research at S&P Global Market Intelligence.

“What had been a pretty precipitous decline in US production doesn’t look like it’s going to be so precipitous anymore,” Glickman said.

As the new supply trickled in, oil refiners’ profits were shrinking. With smaller margins and high inventory of products like gasoline and diesel, refiners had little incentive to produce more, leaving crude inventories to pile up, Glickman added.

In the background is the decision by the Organization of Petroleum Exporting Countries (Opec) to continue its market share grab and pump as much oil as possible. Some news reports suggest Opec’s July production could be a record because of increases from Iran and Nigeria.

That bloated inventory is evident in data from the Department of Energy’s statistical arm, the Energy Information Administration, which shows continued historically high levels of crude oil. Haworth said hopes were high the summer driving season would deplete some of those stocks. Demand is strong, but so far has been under expectations.

“The market appears somewhat disappointed how inventory declines happened during peak seasonal demand … It happened less than we all expected,” he said.

The swiftness of oil’s rally to $50 may have spooked users, said Jay Hatfield, portfolio manager for the InfraCap Active MLP exchange-traded fund (AMZA).

“People are sensitive to prices … we need lower prices to clean out the excess inventory,” he said.

Some worries about global demand contributed to the recent selloff. Chinese imported oil demand is slowing, said Haworth, Glickman and O’Neill. Additionally, O’Neill added there are still concerns about European demand following the UK’s decision to leave the EU and the lower-than-expected US gross domestic product data also weighed on sentiment.

“There’s nothing on the economic side that indicates a need to rush into buying,” he said.

Haworth, Hatfield and O’Neill, said as prices weakened into July, short-term traders followed the downward momentum and established positions to benefit from further price drops. That compounded the price break and helped to send values to the $40 level.

Hatfield said in the near-term there’s little reason for demand to pick up since the energy markets are entering the “shoulder season” where refiners take downtime for maintenance, and as they get ready to switch from summer fuel blends to winter fuel blends. Weather during the next few months usually temperate with no increased heating or cooling needs.

Prices could dip a little further, but none of the market watchers expect a retreat to the $20s. Nor do they see prices going much above $50. Also, most investment banks haven’t changed their long-term price forecasts for crude oil to be near $50 toward year’s end.

However, the crude-oil market’s actions have confounded many in the past two years. Part of that might be because there’s a still a bit of a bias that crude oil prices usually rise, O’Neill said.

“Many markets have a bias (on price direction). Being bullish crude oil for the last 10 to 15 years clearly was right. But that might not be the case anymore,” he said.